Next-generation Supply Chain Optimization

Article
Jul 18, 2007

By Dr. Harpal Singh

The traditional supply chain optimization approach is to implement a planning hierarchy such that strategic, tactical and operational decisions are separated and addressed in sequence. Tactical planning is done within the constraints imposed by strategic planning, and operational decisions are strictly guided by tactical plans. This approach aligns well with the normal management hierarchy of a company, but it invariably imposes time lags in decision-making, which in turn introduce supply chain inefficiencies. Often, changes on the ground make the initial assumptions incorrect, and operational decisions become a compromise between what the plan says and what must be done to serve the customers.

The modern supply chain environment is becoming more dynamic because the environment within which optimization decisions are made is constantly changing. The ability to react to changes is as important as the ability to create an initial optimal plan. In fact, the real issue is often not how well you plan, but how well you can re-plan.

This is not to imply that strategic or tactical planning is irrelevant. There simply must be constant and consistent feedback from operations with regard to these processes. As an example, traditional supply chain tactical planning very often operates on a monthly cycle. The next generation of systems will support a process that is initiated by triggers. They will constantly monitor the environment, measure the environment's departure from earlier assumptions and initiate a tactical planning cycle when necessary. Planning will be triggered not by a monthly reporting need but rather by facts on the ground.

In the next evolution of supply chain planning processes, strategic, tactical and operational plans will no longer be viewed as separate entities with interfaces. The supply chain will have a single unified plan, albeit at different levels of detail. This will support the ability to measure the impact of operational decisions on tactical or strategic assumptions.

Adopting the paradigm of a single, universally visible plan has strong implications for supply chain optimization. First, many supply chain decisions will be decentralized because the impact of these decisions will be constantly visible to all. Second, metrics that measure supply chain performance will no longer have to be confined to a portion of the business process but will increasingly be focused on overall efficiency.
How does a company incorporate these ideas into its supply chain optimization processes? There are a number of organizational, systems and process changes that must be introduced.

Organizationally, the movement toward a single unified plan is facilitated if there is a single organization responsible for the entire supply chain. This enhances the view of the supply chain as a single business process rather than as a collection of manufacturing, planning, demand management and logistics functions. As visibility is increased and metrics become more universal, decision making can be moved closer to the operational level.

The systems required to support these processes must be able to transform an existing plan rather than just have the ability to create an entirely new plan. They must be able to incorporate incremental changes, as well as report on the differences between previous and current plans. Additionally, the systems must be able to measure the impact of operational decisions on tactical assumptions rather than just impose the tactical assumptions as constraints. Lastly, the systems must be able to constantly measure changes to demand, logistics and manufacturing, and trigger re-planning when the assumptions of the existing plan become irrelevant.

One key realization is that a supply chain should be optimized as a whole rather than in parts. While it may seem easier to manage in the short term, optimizing in parts often leads to a lack of understanding of the big picture and inconsistent decision making. In practice, though, the systems and processes adopted by most companies continue to be segmented. In the next generation of supply chain optimization, the idea of "optimizing the whole" will be translated into practical processes and practical systems.

About the Author:Harpal Singh, Ph.D., is the co-founder and CEO of Supply Chain Consultants. More information at www.supplychain.com.